To add to the excellent answers above:
finding that you have competition is an amazing thing when you think about it in the right way. It means your market is real enough, that other people are excited about it to. You can even use your competition as a form of social proof to investors, the fact that you have competition validates your idea, and your market to an investor. When someone says "We have no competition. We're the only company out there doing this" The first thing that goes through my mind is "If it's such a great idea, why isn't anyone else doing it?.
Your competitor is laying the groundwork for you, and actually doing you the favor of testing out your product for you.
The best thing you can do is acknowledge your competition, and learn from their mistakes. Follow them closely as time goes by, and learn what works, and what doesn't. When you present to investors, make sure you not only bring up your competitor as a potential problem, but present your method for dealing with this problem. If you bring them up, but don't have a way to address them, then you're not going to be received well by investors, but if you don't bring them up at all, and the investors find out about them, you are screwed pretty bad for not doing your own due diligence.
I'm speaking from my own experience here as well. I got through my first funding round (Friends and family), and started my company, and got most of the way through development before I even search for competition, and imagine my surprise when I find six other companies doing the same thing. But it was a great thing I did find them. I was able to look at their strategy, and figure out why none of them were experiencing a high level of success at this point. I've integrated that knowledge into my business planning, and now we're already on track for exceeding all of our competitors in the first year.